INTRO TO AG ECON
INTRO TO AG ECON ARE 012
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Popular in Agricultural & Resource Econ
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WELCOME TO ARE 012 Introduction to Agricultural Economics With Herman Sampson Remember my of ce is 4332 Nelson Hall and my phone number is 5154676 If you have questions please do not hesitate to come by the of ce call or reach me via email The syllabus let s you know when I am in class or lab and when I am usually in my office I am on several committees and am often active with student organizations These activities often require that I be out of the of ce at certain times during the semester I will try to let you all know when I will not be in my of ce If you call and my voice mail answers please leave a message If my phone rings once or twice and voice ma picks up I am in the of ce talking on the phone to a student alumni colleagues or perhaps family If my phone rings four or more times and voice mail answers I have stepped out of the office for a moment to get a soft drink or go to the rest room Please leave a message My email address is hermanisampsonncsuedu That little dash thing between my rst name and last name is called an underscore You press the shift key and hold it down then press the dash key That dash key is located next to the zero key on my keyboard Microeconomics the trees Studies economic behavior of individual decision making units such as Consumers Resource Owners Business Firms producers in a market economy At times micro will study economic behavior at the industry level Associate microeconomics with the individual trees in a very large forest Some of the trees are known as consumers some can be referred to as resources owners and some can be called business rms Microeconomics studies the behavior of these individual trees that we also consider to be individual decision making units Microeconomics can also study clumps of trees that we can refer to as a group of consumers ie AfricanAmericans between the ages of 18 to 25 a group of business rms collectively known as an industry ie the swine industry in North Carolina or a group of resource owners ie farmland owners in North Carolina Of course these broad classi cations do overlap each other Virtually everyone in our econom is a consumer of oods and services and we shall learn that we are all resource owners as well When we visit a grocery store and purchase items we are considered consumers When we sell our physical and mental abilities to employers we are resource owners When we produce a good or service and sell it for a particular price we are considered A roducers So it is A ossible for an individual to be all three Macroeconomics the forest Studies the aggregate level of economic activity Economic system s value of total output GDP Level of National Income Total Level of Unemployment General Price Level of the Economy In ation Associate macroeconomics with studying the forest as a whole We can study the general health of the forest the general growth rate of the forest determine which portions of the forest might be having some troubledisease or pest problems Rather than looking at individuals trees or small groups of individuals clumps of trees macroeconomics focuses on how well the economy as a whole is functioning and in what direction the economy may be heading We measure the economy s value of total output or Gross Domestic Product GDP from year to year to determine if the US economy is expanding growing or contracting shrinking GDP is the monetary value of all the goods and services produced within the boundaries of the Us Therefore GDP is the value of the production of all US companies producing goods and services GampS within the US as well as all foreign owned companies Honda for example that produce GampS within US Think about it Foreign owneu companies mre mu workers to produce their goods and services Economists like to see the Us economy grow at what is called a sustainable rate believed to be around 25 to 35 per year Some economists believe that if growth exceeds 25 per year for very long in ation will occur Other economists currently believe that the sustainable rate of economic growth fui um US lb greater than 25 As the economy grows new jobs are created and unemployment rates tend to decrease Real GDP Growth Percent 3 I V P e y c e n 2 l e 0 P 1 V 0 00 92 93 94 95 96 97 93 99 2000 20012002 2003 2004 2005 2006 2007 The graph above illustrates real gross domestic product growth from 1990 to 2007 Think of real GDP growth as one of the vital signs of the economy Think about when you visit a doctor s office Once you get into an examination room a nurse usually takes your temperature checks your heart rate and blood pressure These are your vital signs Well economist use real GDP growth as one of the vital signs to monitor the health of the economy The dip in real gross domestic growth below zero indicates the 199091 recession that occurred following the first Gulf War Arecession is de ned as two consecutive quarters of negative growth in real gross domestic product Since the 199091 recession real growth has been above 25 for most ofthe decade long economic expansion from 1991 to 2001 From March 2001 to November 2001 the US experienced a recession as determined by the NBER National Bureau of Economic Research The sustainable growth rate is derived from two factors the US growth in A o ulation and Us A roductivit growth Productivity is measured as economic output per hour of labor Historically population growth has been averaging 10 and growth in productivity has averaged 15 per year The sum of these two measurers provides the sustainable growth rate for the economy But during the 90 s computer technology had become more integrated into the economy and has enhanced productivity growth For the 90 s productivity growth averaged well above the 15 historical benchmark and has allowed the economy to grow at faster rates without major trouble from in ation So many economists believed that the economy during the 90 s could have grown faster than the previously believed 25 without in ation worries But the question is how long will the economy enjoy these larger than historically normal increases in annual productivity National Unemployment Rate Us n e quot 5 p 04 y m ES n 2 R 31 l e D A DOrvl II lU V mmmmhhwmmmo rrmNmmavmuutorollm A 7999626290qu99999q19eQQQDQPQQDDQQPQQQQPQQ 7ciz C77i 777 Egggagagg 43 23 3 4 42gsi gagagsgsga The national unemployment rate is another vital sign of the Us economy Full employment in the economy is generally accepted to be 50 unemployment Unemployment rates below 50 tend to result in increased pressure on in ation due to wage increases as producers compete with each other to nd quali ed labor to expand production From 1992 the national unemployment rate had been generally decreasing even dipping below 40 to 39 Again our friend productivity growth has been the pressure relief valve for in ation pressures Enhanced productivity allows workers to produce me within the same hour of work so employers can afford to pay workers more without having to try and pass the increased labor cost on to consumers in the form of higher product prices For example let us assume that the wage rate at a furniture factory is 1000 per hour and 4 employees at the furniture factory can produce a two reclining chairs per hour Labor cost per reclining chair is 4000 2 chairs or 2000 per chair Now let us increase the wage rate to 1400 per hour and introduce new technology that allows the four employees to produce three chairs per hour What is the labor cost now per chair 5600 3 chairs or 1867 per chair So even though the wage rate increased the labor cost per chair decreased due to increased productivity pursuant to the use of new technology We again saw unemployment rise during the 2001 recession but then quickly decrease again In this case the productivity gain may allow for increased profits or possibly lower prices to consumers So today even the 50 unemployment benchmark is being questioned But again will productivity growth continue at its current pace Industrial Capacity Utilization Rate Capacuy Utilization Rate MonthNear Above is the industrial capacity utilization rate Amouthful to be sure This vital sign uses an 85 industrial capacity utilization rate as its benchmar Economists believe that rates above 85 tend to be in ationary Rates above 85 tend to cause production costs to escalate as we are pushing our economic engines to the red line Think of the engine in your motor vehicle It has an rpm range that is most ef cient in terms of the inputs that produce power gas and air If you have a tachometer on the dash board you will notice a red line Sure you can rev that motor to the red line and above but how long with that Juuun last if you are constantly running it to the limit Gas consumption starts to increase rapidly as greater demands are placed on that engine What will happen to operating costs of that motor vehicle if you are constantly squeezing every horse power out of that engine They are going to go up not to mention all the speeding tickets you will acquire Well a factory a computer a business has a red line as well Machinery breaks down people get tired irritable sick etc At the red line productivity starts to decrease and costs begin to increase So 85 industrial capacity utilization is thought to be the red line for our economic engines Can you point out the 9091 recession and the 2001 recession in the data above Percent of capacny 100 I00 95 95 Utilization 85 55 on rquot 1970 1975 1900 l985 1990 1995 2000 2005 Notes See note on cover page Here is the industrial capacity utilization data again over a longer time period Recessions are identi ed with gray shading Notice how the ICUR dips during recessions In the graph above the gray line is total capacity utilization and the red line is manufacturing capacity utilization WorkForce Productivity Output per Hour Worked 35 u m u Percent Increase u 90 91 93 93 94 95 96 97 98 99 2000 2001 2002 2003 2004 2005 2066 2007 15 OTR 2008 Year S Above is work force productivity or economic output per hour worked with respect to human labor The productivity gains from 1995 to 2002 was the safety valve that relieved in ationary pressures on prices in the economy during that time period As I have remarked before we do not know how long these productivity gains will remain at higher than historical levels When will computer technologies be fully integrated into the economy What new technologies are in the pipeline that will continue to allow us to produce more with the same amount or fewer resources Productivity growth is an important vital sign that economists will have to continue to monitor And you thought the human body was a complex dynamic system Well the economy is a pretty complex dynamic system as well The general economy macroeconomics gets sick too I 39 and get 39 disorders as well microeconomics And economist can prescribe medications as well Fm the general economy lower or higher interest rates lower or higher taxes more or less government spending are medications use for when the economy is too hot or too cold Ifthe economic doctors misdiagnose the cause of an economic illness a recession or a terrible bout of in ation could occurs as a result of prescribing the wrong medicine Macroeconomics the forest we will deal with some macroeconomic topics rst then concentrate on microeconomics During the first few weeks of class we will discuss some very general economic principles and then tackle some macroeconomic concepts and popular issues such as a balanced federal budget We hear folks complain all the time about the federal budget and suggest that balancing that budget is very simple We also hear folks talking about how they do not understand how the government can spend more money than it brings in through tax revenues Well you are going to get your chance at balancing the federal budget We will also discuss public debt such as the federal deficit and the national debt and compare that to the nation s private debt Private debt is the amount of money most of you and I owe on credit cards auto loans mortgages etc We will nd that man of our fellow citizens have dif cult balancin their own budgets Normative Economics Normative subjective value laden emotional What ought to be economics Rx andor Policy oriented Hear a bunch of normative economic statements during political elections IO Before we get to some of those topics we need to distinguish two other branches of economics Normative and positive economics Normative economics tends to be subjective value laden and emotional in its presentation Normative economics is often referred to as What ought to be economics We ought to do this or we ought to do tha Normative economics is prescription andor policy oriented During political elections we hear a great deal of normative economics from the candidates for office Every four years a new person comes along that claims they have the answer to all of the our country s economic problems vvu should raise taxes We should lower taxes The rich do not pay enough taxes These are all normative economic statements That person is hungry we have to feed them Again a normative statement Positive Economics Positive Objective without emotion or value judgment What is What was What will be economics Based on probability and statistical methods A branch of economics that I personally try hard to ascribe to is positive economics Positive economics is objective without emotion or value judgements Positive economics can be referred to as What is what was and what probably will be economics Positive economics is based on sound economic theory probability and statistical methods Positive economics studies and determines the probable outcomes from an increase or decrease in taxes Positive economics does not prescribe that taxes should be increased or decreased That decision is for the people of our democratic society to evaluate and decide through their duly elected political representatives Positive economics provides only the probable outcomes of alternative decisions It is assumed that an educated society will make the most rational choices for themselves and exercise those choices in the marketplace Positive economic analysis strives to explain current economic phenomena as well as answering quotwhat ifquot type questions without value judgements That person is hungry What is the cost of feeding that person What is the bene t that you or society will accrue if that person is fed What is the cost of not feeding this person What is the benefit from not feeding this person Positive economics tries to objectively answer these questions by doing what is called a costbenefit analysis 11 Microeconomics Normative microeconomics Positive microeconomics Macroeconomics Normative macroeconomics Positive macroeconomics As you can see economics can be basically broken down into two major areas of study 39 39 and 39 with each major area being further divided into a normative or positive perspective Macroeconomics 1 Fiscal Policy Govt tax and spend policies 2 Monetary Policy Manipulation of the money supply by the Federal Reserve system to affect shortterm interest rates and control in ation From a government policy perspective macroeconomics focuses on two primary issues Fiscal Policy which deals primarily with the amount of government spending and taxation The Federal Budget is basically the government s taxation and spending policy Monetary Policy which is controlled by the Federal Reserve currently chaired by Alan Greenspan The monetary policy of the Federal Reserve affects shortterm interest rates directly and in ation and longterm interest rates indirectly The current priority of Mr Greenspan is to keep in ation in check Private Property Rights Negative Externalily When you produce or consume a commodity or service within your private property rights that imposes a cost on a third party not directly involved in the market transaction In a competitive market system such as ours property rights have been established to facilitate the exchange of commodities and reduce the resources required to protect private property Property rights are often constrained by the enactment of legislation due to the realization of a negative externality The best way to explain this concept is through an example Lets take a look at second hand smoke Aperson has bought a pack of cigarettes The cigarettes are now their private property They pull out a cigarette in class and start smoking exercising their right to use their private property However a member of the class has asthma This student begins to have labored breathing associated with the onset of an asthma attack I have to stop class and call public safety to transport this student to the ER for treatment Another student in class is aller ic to ci arette smoke Their e es start waterin their nose becomes congested and they are generally uncomfortable and find it hard to concentrate in all their classes the rest of the day The smoker has imposed a negative externality on these two individuals and the class as a whole while exercising their private property rights Another example would be a producer that pollutes the environment Private Property Rights The cost imposed on the third party is very dif cult expensive for the third party to recover AKA a Spillover Cost What was the cost on other people for the smokers right to smoke Class had to be stopped to take care of the student with asthma so everyone missed a lecture they had paid for The student with asthma misses the rest of hisher classes and has a hefty emergency room bill the most expensive form of medical care available that heshe or their insurance company must pay Remember health insurance companies extract premiums from their customers As health care costs increase very often insurance premiums increase as well The student with the allergy is generally miserable The smokers rights have infringed on the rights of others and it is very difficult if not impossible for the others to recover their damages from this smoker Thus legislation is passed that forbids the consumption of cigarettes in certain public areas to resolve this negative externality Private Property Rights Laws are often enacted by legislative bodies that constrain private property rights in order to rectify negative externalities or at least reduce the cost to third parties in recovering damages An individual s recourse in the matter of a negative extemality is usually a civil law suite such as the one led by airline stewardesses against the tobacco companies in 1997 Lawsuits can be very expensive for individuals and society but they are a means of recovering damages imposed by another s use of their private property Aug 1996 FDA classi ed nicotine as a drug and proposes increased regulations on the tobacco industry to reduce the incidence of teen age smoking This FDA action precipitated the law suites led against tobacco companies to recover costs associated with treating smokers under the Medicare and Medicaid programs All of this in response to a negative extemality The recent outcries by some citizens of North Carolina and the national news media stem from a erceived ne ative eXtemalit Some eo 1e are accusin the swine industry of NO of contaminating their ground water supplies with excess levels of nitrogen Others are claiming that the odor from swine facilities has decreased the value of their homes and land resources that they own As a result calls for new legislation have surfaced The NO legislature in 1997 considered a twoyear moratorium on the building of any new swine facilities until research studies could document any problems or not Negative Externalities Some Examples Seat Belt Crack Down in NC Click It or Ticket California Helmet Law for Motorcyclists Let s take a look at some other examples of negative externalities The seat belt law has provoked many people to question whether government has a right to tell them they must wear a seat belt in an automobile or wear a helmet on a motorcycle The negative externality arises because of the scientific data that informs us that people involved in auto accidents that wear seat belts have less injuries than those that do not wear seat belts We have also been informed that seat belts reduce fatalities associated with auto accidents Society very often must pay for these injuries and deaths through tax dollars because many of the persons involved in these accidents do not have ample insurance coverage Think about the medical bills time missed from work disabilities and the care to be given to children that may be left behind in the event of the death of a parent The social burden can add up quickly Of course the same argument can be used for a motorcycle helmet law Have y ou ever heard someone s head hit the A avement and see the head trauma that occurs Buy a cantaloupe and give it a hurl onto the pavement one day for a graphic visualization We have the technology to keep virtual vegetables alive today for an extended period of time Who pays for this Another problem Federal Highway money is tied to seat belt compliance If a lot of people choose not to wear their seat belt Federal Highway Funds are cut off Will state taxes be increased to meet the highway needs ofNC How will you feel if your state income taxes are increased because a large group of citizens choose not to wear their seat belt What if you are a highway construction worker that gets laidoff because of the loss of Federal Highway Funds Negative Externalities Possible Solutions 7 Pass Laws 7 Post Bond to assure nancial responsibility A solution laws are passed mandating that citizens wear a seat belt and children up to a certain age and weight be con ned to approved restraint devices Another solution post bond suf cient to cover your financial responsibilities then you can do as you wish with regards to a seatbelt or motorcycle helmet Otherwise you may be asking society to bear the burden of your decision to not utilize safety devices while operating a motor vehicle in the event of an accident I have presented to you some perspectives that you may not have previously considered What do we do What course of action do we take to alleviate this negative externality That is up to you to express to political representatives True we are sacri cing some personal freedom if we pass a law mandating seat belt or helmet use cost What is the benefit from doin so What will be the net benefit What if we don t pass any laws cost that constrain personal freedoms benefit What is the net benefit of this decision Negative Externalities Some Examples Imperial Foods of Hamlet NC vs Imperial Sandwich C0 of Goldsboro NC Another example of the obvious affects of a negative externality and an example of the not so obvious affects can be derived from the Imperial Foods incident in Hamlet NC In 1991 the owners of Imperial Foods padlocked the re exits of the food processing facility because of product losses that were alleged to be taking place In other words employees were alleged to be carrying stuiT out the back door A re occurred within the plant and I believe 28 people lost their lives due to the re exits being locked The obvious recourse here was to pass more stringent inspection laws and hire wow inspectors The not so obvious negative externality was born by a small sandwich making company in Goldsboro NC named the Imperial Sandwich Company These two companies were not associated with each other in any way The only thing they had in common was a similar name As are result of the Imperial Foods asco Imperial Sandwich Company received numerous phone calls and letters that were not attering Businesses that confused Imperial Sandwich Company with Imperial Foods canceled orders Convenient stores refused to do business with them anymore Imperial Sandwich Company quickly faced nancial problems The company was salvaged only after changing its name to disassociate itself from Imperial Foods How does Imperial Sandwich Company recover its loses due to Imperial Foods lack of rational behavior We have a negative externality Positive Externalities When you produce or consume a commodity or service within your private property rights that bestows a bene t on a third party not directly involved in the market transaction 20 As you recognize a positive externality is just the opposite of a negative externality And again an example is the best way to explain this concept Let us assume that you own a home in a subdivision of Raleigh You spend thousands of dollars landscaping and maintaining your home site You maintain your house very well Your neighbor is one of those folks who just does the minimum Hisher place looks OK but it is not on the Parade of Homes list Do your actions increase the value of your neighbors home If heshe were to place their home on the market would the potential buyer look around at neighbors homes and the neighborhood in general 20 Positive Externalties The bene t bestowed on the third party is very dif cult expensive for the third party to recover AKA a Spillover bene t I think you would agree that you have added value to your neighbors home Now how will you get that value added to your neighbor s home when heshe sells it Will you politely ask for your share at the closing What is your neighbor likely to tell you Thus we have what is known as a positive extemality Now assume you have a neighbor that does not maintain their home site well at all Your neighbor has junk cars in the back yard on cinder blocks a goat running around grazing the over grown crabgrass in the yard and paint peeling off the siding and trim This would probably diminish the value of your well kept home negative extemality How would you recover this loss Do you now see the rationale behind the development of Homeowners Associations and restrictive covenants that are placed in real estate deeds These legal instruments are used to preserve and maintain the value of homes in sub divisions Zoning ordinances and municipal land use plans are other legal prescriptions for preserving or enhancing real estate values Another example of a positive extemality is EDUCATION Higher education leads to increased GDP economic growth and lower crime rates 21 ACCOUNTING PROFIT ECONOMIC PROFIT NORMAL PROFIT ACCOUNTING COST EXAMPLE Current operations March 1 owns 500 acres of very good cropland averaging 100 bushels per acre Eprice Eoutput Total sunk cost Etotal variable cost Etotal cost Etotal revenue Etotal cost Etotal net revenue Eaverage total cost 300bu 50000 bushels 15000year 80000 95000 150000 95000 55000 accounting profit S 190bu Opportunity arises You have been wanting to double your production for some time now when a neighbor tells you he has 715 acres of cropland he will rent you for 4500 per acre payable at harvest therefore no interest Eprice 300bu Eoutput 100000 bushels Total sunk cost 15000year Evariable cost 30000year for additional mach amp equip 32175 rent for land 80000 other variable inputs owned land 113935 other variable inputs rented land Etotal variable cost 256110 Etotal cost 2711 10 Should we produce and sell the additional 50000 bushels a Eaverage total cost 272bu b Etotal revenue 300000 Etotal cost 2711 10 Etotal net rev 28890 accounting pro t Had we based our decision on the ATC we would assume since our price 300bu was more than ATC 271 that we would make a greater profit with an increase in production and sales Such is not the case WE must calculate through to the TNR and determine whether the TNR of the quotpossible situationquot will be greater or less than the TNR of the quotcurrent operationquot Therefore average costs have limited usefulness for economic decisions Lets analyze this same problem in somewhat of a different light TR TR1 TR0 300000 150000 150000 SUNK COSTS ARE IRRELEVANT TVC TVC1 TVC0 271110 95000 176110 TNR TR TVC 150000 176110 26110 From this line of reasoning we develop a fundamental rule for making economic decisions Marginal revenue Change in TR associated with a one unit change in output MR MR TRQ TRI TRo Q1 Q0 300000 150000 100000 50000 150000 50000 300bushel Therefore the MR Price of the commodity per unit for a price taker Marginal cost change in total variable cost associated with a one unit change in output MC MC TVC Q TVC1 TVCo Q1 Q0 271110 95000 100000 50000 176110 50000 352BUSHEL Marginal cost and marginal revenue are the two most important concepts of economic decision analysis The process is called marginal analysis We will rationally decide to increase production or venture on a business deal only if MR gt MC ECONOMIC COST EXAMPLE What cost do we need to add to our analysis to make the example conform to economic cost principles ill THE OPPORTUNITY COST OF OWNED RESOURCES ill 1 Current operations Total sunk costs Evariable costs Etotal var costs Etotal costs Etotal revenue Etotal costs Etotal net revenue 15000 80000 for variable inputs 25000 oppty cost of owned land 20000 oppty cost of labor amp mgmt 5000 oppty cost of owned capital 130000 145000 150000 145000 5000 ECONOMIC PROFIT 2 Opportunity Total sunk cost Evariable cost Etotal var cost Etotal cost Etotal revenue Etotal cost Etotal net revenue 15000year 130000 for current operations 176110 for additional mach amp equip 1000 oppty cost of additional owned capital 307110 322110 300000 322110 22110 ECONOMIC LOSS Is this his TOTAL economic loss Let39s see TR TR1 TR0 300000 150000 150000 TVC TVC1 TVC0 307110 130000 177110 TNR TR TVC 150000 177110 27110 Let39s take another look at MR and MC MR TR1 TRo Q1 Q0 300000 150000 100000 50000 150000 50000 300 bushel MC TVC1 TVCO Q1 39 Q0 307110 130000 100000 50000 177110 50000 354 bushel ltgt Working With Graphs hs In General A graph is a visual representation of the relationship between two or more variables We will deal with just two variables at a time hs In General 1 Independent variable This is the variable that influences the dependent variable X variable 2 Dependent variable Its value is determined by the independent variable Y variable hs In General 3 We say that the dependent variable is a function of the independent variable Y fX Axis ofa Graph Dependent Variable Yaxis Independent Variable Xaxis ct Relationships ozo A person39s weight and height are often related ozo If we sample 1000 people and measure their weight and height we would probably find that as weight increases so does height Ct Relationshi s v Height Weight a ct Relationships ozo There is a direct relationship between height and weight oz Have a direct relationship when T indep variable 2 dep variable T l indep variable 2 dep variable i 8 rse Relationships There is strong evidence indicating that as price rises for a specific commodity the amount purchased decreases rse Relationships Price per Unit Demand Curve Quantity Purchase per Unit Time 10 rse Relationships ozo There is an inverse relationship between price per unit and the quantity purchased per unit of time oz Have an inverse relationship when 1 indep variable T 2 l dep variable 2 indep variable l 2 Tdep variable 11 oz Evidence suggests that income from wages increases up to a certain age and then decreases until death plex Relationships 12 plex Relationships Income from Wages 53 at or near the age of retirement plex Relationships ozo There is a direct relationship between wage income and age up to a certain point known as retirement ozo then an inverse relationship exists from retirement to the individuals expiration date 14 plex Relationships Income from All Sources 53 Age 15 Notice that the Yraxxs has beau changed to mcome from all sourcesquot whxch sources to look hke the graph above7 1 hope not plex Relationships Income from All Sources 53 like the graph above Constant mcome from the pomt ofreuremem mm 7 at have we observed happ us no pnces over Lime7 em m auom Ifo um 15 con 0v eye 1 c u be decreasmg as m auon a des of our xed nommal o Lhev 1u mcome W39ha W11 appm oour standard oflwmg asurneprogesseswlth a xedquot nommal mcome7 It wm mostprobably aode wand Lhe declmmg purchasmg power of our constantf1xed mcome plex Relationships Income from All Sources 53 What should Now the gaph above looks more llke what we would hope to see m our golden years ll At the mlmmum our lncome from all sources should mease 9n lu l that your slandard of llylng wlll be malntalned alter you reme Is to saye and y y rut ull J 4 L were younger w Security Issues True 3alse Social Security was NEVER intended to provide benefits sufficient to be the sole source of retirement income 18 TRUE 1 Security Issues Current Social Security tax rate 765 percent OASDI TAX Old Age Survivors and Disability Insurance The 2000 rate of tax is 62 percent to a taxable wage limit of 76200 The maximum tax an employee may pay is 450120 19 What we refer to as social security is really three different programs There is a retirement program a disability program and a medical insurance program that is referred to as medicare There are also three different trust funds associated with these programs The retirement program that was started in 1937 is officially known as the Old Age and Survivors Insurance Fund or OASI The disability program was initiated in 1957 and is officially known as the Disability Insurance Fund or D1 The OASI taX rate for 2000 is 530 and the DI taX rate for 2000 is 90 These two programs discussed collectively are termed as OASDI with a combined taX rate of620 on the rst 76200 of wages 1 Security Issues Hl TAX Federal Hospital Insurance The 2000 rate of tax is 145 percent without a wage limit The maximum tax is therefore unlimited 20 What we call medicare was established in 1966 and is of cially referred to as the Medicare Hospital Insurance Fund or H1 The taX on wages for medicare is 145 for the year 2000 and there is not wage limit associated with this taX w Security Issues oz Social Security covered 58 percent of the work force in 1940 covered over 90 percent in 1990 ozo Over this 50 yr period REAL benefits have increased and coverage has been extended to spouses widows and dependents 21 w Security Issues oz Today elderly as a group have lower poverty rates than the general population and about the same per capita income w Security Issues oz Greater than 90 percent of all persons 65 or older receive Social Security oz On average SS equals 38 percent of total income received by elderly households ozo For 25 percent of older households SS equals 90 percent of family income w Security Issues ozo For 15 percent of older households SS equals 100 percent of family income oz To maintain preretirement living standards middle and upper income households must have additional income from employer pensions or private savings 24 39storical Social Security Tax Rates oz Before 1950 SS rate 10 percent paid by both the employer and employee oz This covered retirement only no disability or Medicare ozo Maximum earnings taxed prior to 1950 3000 oz Maximum tax paid prior to 1950 30 per employee 30 per employer 25 39storical Social Security Tax Rates ozo In 1970 the maximum retirement tax paid was 28470 Matched by employer ozo In 1990 SS retirement tax rate 560 percent Maximum earnings taxed in 1991 51300 oz Maximum tax paid in 1991 287280 per employee Matched by employer 26 39storical Social Security Tax Rates ozo In 2000 SS retirement tax rate 530 percent Maximum earnings taxed in 2000 76200 oz Maximum tax paid in 2000 403860 per employee Matched by employer 27 re of Social Security oz Funds in the SS trust fund will peak in 2030 at 12 trillion no cash all gov bonds ozo I will be 73 years old ozo You will be years old 28 re of Social Security ozo After 2030 these trust fund assets decrease rapidly and will be equal to zero in 2046 at the current SS tax rates ozo In 2046 I probably will be in a state of mind such that I won39t care ozo You will be years old 29 re of Social Security ozo As the population of our country continues to age the ratio of workers beneficiaries will decrease ozo The W S ratio is expected to remain stable between 1989 and 2010 but will then decrease Year 2010 2020 gt 2020 re of Social Security WB quotBaby Boomersquot start 35 hitting 65 in 2010 27 21 31 re of Social Security oz Building up the trust fund NOW will reduce the expected tax burden on future workers YOU by making Baby Boomers ME pay higher taxes to partially finance their own retirement benefits 32 We start with a horizontal number line At V 39 y tructm A Gm h 8 P A L V 1The points on the line divide the line into segments 2All the line segments are equally spaced 3Numbers associated with the points increase in value from left to right 4Use a distance so many points to represent a quantity 34 39 y tructm A Gm h 8 P 7 5 3 1012345678 8 6 4 2 a Vertical Number Line 1 Construct a vertical number line 2 Points divide the line into equal segments 3 Numbers associated with points increase in value from the bottom to top 4 The scale can be different from the horizontal number line 36 a Vertical Number Line 37 ake A Graph 1 The vertical and horizontal number lines must intersect at each others zero point 2 They must be perpendicular 0 0 ake A Graph The vertical and horizontal number lines should look like the illustration below 39 ake A Graph 3 Result We get a set of coordinate axis or a coordinate number system eg Sighting in a rifle scope on the range Now that we have combined the horizontal and vertical number line they have become coordinate axes The horizontal number line is referred to as the X aXis and the vertical number line is referred to as the YaXis We can now reference a point on a graph with two numbers or coordinates When referencing a point on a graph we always call out the Xcoordinate first and then the ycoordinate For example Xy references the coordinate of some p01nt Let us go to the ring range and sight in a Ii e am the lucztinn Aboveyou see a targef thatwm be usedto stght In or zeroquot an e You see W cm thtersect each other Graphtcauy thetr htersecttoh potht 15 called the ortgth and has the coordmates 00 Thus the term zero en e ees ots are made and prtnte on e rg T shots cohstttute a u goup quot m the center of the three shot group and you three shot group7 Ifyou answered 32 you are correct Youhavealso told nght ofzero and two hches abovezero Thepersoh fmng the n e how lmows how to correct the atrmhg devtce to brthg the rearm to 250quot Moving the aiming device three inches to the left and two inches down will bring the point of impact to the coordinates 00 The ri e is now sighted in to be on at the current yardage Guess what We have been graphing We identi ed two points on a piece of graph paper the target Some of you have been graphing since you were pretty young and before you may have been formally introduced to this concept in school yes thrs rs graphmg toot whether the u crossharrsquot ruustrated above are supenmp osed by a rearm or a camera we are usmg them to locate a central pomt of arm to take a beauuful prcture or harvest many deherous meals to share wrth famrty amends aequamtartees and evm the already antaged through the Hunters for the Hungry Program What39s my Just a ume outquot for amoment to enjoy the beauty of mother nature ake A Graph 4 With a graph you need two numbers to specify a single point OR When you see a point on a graph you know that point represents two numbers SICS YOU NEED TO KNOWABOUT PHING AND THE COORDINATE NUMBER SYSTEM Axis defined ozo The vertical number line is reserved for the Dependent variable and is referred to as the Y AXIS oz The horizontal number line is referred to as the X AXIS and is reserved for the Independent variable origin and points on the ph ozo The point of intersection of the two number lines is referred to as the ORIGIN 47 Point A O 123 Point A represents two numbers A value for x and a value for y What are the coordinates for Point A If you said 23 you have got the hang of this origin and points on the ph ozo Every point on a graph represents a pair of observations of x and y xry ozo In this class y will often represent price and x will often represent quantity 49 Slope Slope change in Y values change in X values Y1 39 Yo x1 39 x0 RISE RUN Slope Price gt 28 X09 370 36 X19 Y1 2 3 Quantity demanded per unit time 51 Any two points can be used to determine a straight line The slope of a straight line is constant Therefore any two points on a straight line can be used to calculate the slope of a straight line Above you see two points on a straight line identi ed Point 28 and point 36 You see two asterisks next to point 28 The two asterisks indicate the point that I have chosen to represent home plate When we hit the ball in baseball or softball we always run FROM home plate TO first base That is the rules The slope is defined to be the change in y divided by the change in X Point 28 is home plate so its generic coordinate becomes X0y0 Point 36 is first base so its generic coordinate becomes X1y1 The slope yl y0X1 X0 68 32 2 l 2 If your head spinning then try to remember the following We always run from home plate to first base Home plate is designated as 0 and first base is designated as l Slope y I am going TO y I am coming FROM divided by XI am going TO X I am coming FROM Slope 2 As X goes from 2 to 3 Y goes from 8 to 6 3AYRISETOFROM 6 8 AXRUN TOFROM 3 2 52 Slope 4SLOPE AY M 2 1 2 5 The slope of a straight line is CONSTANT Class Exercise Now try the class exercise in your notebook to graph a straight line and calculate the slope Why Understand Economics Big Three US Automakers and the Strong Dollar of 1986 1986 1 gt 240 yen 1988 1 gt 120 yen 1994 1 gt 11358 yen 1995 1 gt 10408 yen 1996 1 gt 10883 yen 1997 1 gt 12105 yen Above you see a timeseries of foreign exchange rates for the Us dollar and the Japanese yen In 1986 1 was equivalent to 240 yen In 1988 the dollar was equivalent to 120 yen Between 1986 and 1988 economists say that the dollar weakened relative to the yen In 1986 the dollar was said to be very strong relative to the yen In 1986 you could buy more Japanese car or truck for your buck than you could in 1988 1994 1995 or 1996 This does not only apply to Japanese cars and trucks but to any commodity imported into this country from Japan w he the dollar strengthens relative to another foreign currency imports from that country are cheaper for Americans to buy When the dollar weakens relative to another country s currency imports from that country become more expensive for Americans to buy Now a little history In 1986 the dollar was very strong relative to the yen Japanese motor vehicles were pretty cheap for Us consumers relative to American made motor vehicles The CEO s from the big three US automakers called then President Reagan for a meeting At this meeting the CEO s asked Reagan to intervene in the foreign currency markets to weaken the dollar This would cause Japanese auto prices to US consumers to increase The theory was to make Japanese imports more expensive so that Americans would buy more Ford General Motors and Chrysler products The US automakers allegedly told the President that this action would allow them to regain market share from the Japanese and improve the health of the Us auto industry Why Understand Economics Big Three US Automakers and the Strong Dollar of 1986 1986 1 gt 240 yen 1988 1 gt 120 yen 1994 1 gt 11358 yen 1995 1 gt 10408 yen 1996 1 gt 10883 yen 1997 1 gt 12105 yen Rather than go after increased market share the US automakers increased the prices of their vehicles as the dollar was weakened by the government intervention Auto industry pro ts soared stock prices increased The American consumer the same consumer that was yelling Buy American ended up paying more for Japanese and American automobiles as a result of this government action When all was said and done US automakers had not gained any signi cant gains in market share The Japanese responded with rebates and low interest nancing and accelerated the building of production racilities in this country to insulate themselves from foreign currency uctuations Agriculture generally bene ts from a weak US dollar When the dollar is weak American commodities are cheaper for foreign countries to purchase Corn wheat and soybean exports generally increase as the dollar weakens These exports remove a portion of the crop from Us markets which generally results in an increase in the A rice that a farmer receives for his croA sold in the Us But remember a weak dollar makes imports from other countries more expensive to consumers and can help fuel in ation Why understand economics More Recent Currency Exchange Rates httpwwwcalsncsneduc0urseareO l Zcurrencypdf Why Understand Economics You can read the Wall Street Journal Article in the Library s Electronic Reserve Room Click on the title of the article Fateful Choice Did US Car Makers Err Bv Raising Prices When The Yen Rose I would encourage you to read the Wall Street Journal Article reference above by clicking on article 5 title You will then be linked to the Electronic Reserve Room at DH Hill Library You will be leaving this web site and going to the library web site You can use your ltBACKgt button on your web browser to get back here or type in the the URL for this segment of the course in your web browser to come back to the course When you get to the Electronic Reserve Room click on Search the Electronic Reserves System and follow the directions there You should be able to access the article Let me know if you are having problems Why Understand Economics 265 of the US Population was Born Between 1946 to 1964 Baby Boomers 2008 44 to 62 years old How will this aging of our population affect our economy in the future Approximately 265 of the Us population consists of individuals born between the years of 1946 and 1964 Collectively these individuals are referred to as Baby Boomers You may have heard of them Some of your parents may be members of this demographic group If you notice these folks were born after World War 11 Think about it Hundreds of thousands of young men and women off at war in Europe and in the Paci c come home after the war to hundreds of thousands of young women and men Do you think they missed each other Presto a bunch of youngin s This same phenomenon occurred after the Korean vvcu ndu to this a relatively prosperous economy during this time period and you can conjecture how folks thought back then about strategic family planning In 2008 baby boomers will range in age from 44 to 62 years old We are talking about a very large group of people with a very large amount of money to spend Most are still working and they are earning substantial incomes that provide them with siyniflcant amounts of discretionary sy endiny Many can A urchase luxury autos beach houses hot tubs vacations landscape services a college education for their children and grandchildren and afford the time to play golf All this spending is and has been a boon to the current economy But what happens when they get older and begin to retire Social Security Medicare Lower incomes and thus tax revenues Home building There are and will probably be more of them and fewer of you They will live longer due to advances in medical technology How will we sustain our future economy Why understand economics A 1993 Study by Prof Ayers of Northwestern University 165 Automobile Dealers in Chicago Area Average Vehicle Pro t White Men 362 AfricanAmerican Men 504 White Women 783 AfricanAmerican Women 1237 Does this represent racial and sexual discrimination or Now that I have your interest I hope let us take a look at a couple of other societal issues from an economic perspective The slide above summarizes the results of a study conducted at Northwestern University by a Professor Ayers in 1993 in Chicago Illinois Graduate students were authorized to nd potential automobile buyers in the above racial and gender categories and provide them with the funds to negotiate the purchase of an automobile As you can see auto dealers were able to extract less pro t from white males than any of the other categories Is there a good ol boy network at play here fostering racial and sexual discrimination It may appear so on the surface Once education levels were gured in the analysis a di erent picture appeared Think about it Let s take a look at this data from an economic perspective What group above would you think would have the most education Remember it was not that long ago that society thought females should get married have children and stay at home what did they need with a quality education My wife grew up during these times but chose to go against the societal grain and get an education Believe it or not there are a signi cant number of folks that still think this way today It was found in this study that education was the primary determinant in the ability to negotiate a purchase price that minimized the pro t to the auto dealer Yes education levels are correlated in this study with race and gender but it is not clear that any type of discrimination on the grounds of race or gender was occurring Conclusion The less you know the more you get ripped off A 1993 Study by Prof Ayers of Northwestern University 165 Automobile Dealers in Chicago Area Average Vehicle Pro t White Men 362 AfricanAmerican Men 504 White Women 783 AfricanAmerican Women 1237 Does this represent racial and sexual discrimination or Individuals with a well rounded education tend to be more confident more assertive and more knowledgeable during purchase negotiations They tend to be less naive and less trusting of others to look out for there well being How often have you seen on the TV news a segment about an older less educated citizen that gets ripped off in some sort of a scam You probably sit there wondering how stupid this person is to fall for this obvious scam They are probably not stupid they are probably ignorant of how to best protect themselves and too trusting of a slick talking con artist Obvious to you maybe but mm less obvious to a less knowledgeable person Ignorance is taken advantage of by those with knowledge in many cases Your best defense is to become as knowledgeable as is economically warranted How many of you truly understand how the auto purchase process really works How do you know if you are getting a good deal or not What did a dealer pay for a vehicle How do you nd out Do you need credit life insurance if you nance a vehicle Should you nance a vehicle with your bank or through a dealership How does that nancing stuff work anyway What is a rate concession Is leasing a good deal or what During my college days Iwas fortunate to work as an independent contractor for a major auto maker s credit subsidiary I repo ed cars and trucks at 300 am in the morning You learn the business and make contacts that you pro t from in the form of lower costs years into the future Want some answers to those questions Email me Are there positive net returns to knowledge education Average Cost of Raising a Child in 2007 Annual Household Expenditures On A Child Before Tax Income Ranges Age lt45800 45800 77100 gt 77100 02 7830 10960 16290 35 8020 11280 16670 68 8000 11130 16310 911 7950 10930 15980 1214 8830 11690 16810 1517 8810 12030 17500 httpWW mmquot quotGila ww 39 quot CRCc1 c2007pdf Above you see a proposed cost of raising a child in 2007 at di erent income levels or standards of living For example families earning less than 45800 per year on average spend 7830 per year for children up to 2 years of age 80200 per year for children between the ages of 3 and 5 Study the table for a minute and think about calling mom and dad and saying Thanks Click on the link at the bottom of the table and visit USDA s web site and read the particulars of this study The estimates include expenses for housing food transportation clothing health care child care and education and miscellaneous expenses personal care items entertainment etc The three largest expense categories associated with raising a child are Housing 33 Food 17 Transportation NI 4 Kids are not cheap to raise are they Average Cost of Raising a Child in 2007 Annual Household Expenditures On A Child Before Tax Income Ranges Age lt45800 45800 77100 gt 77100 Total 148320 204060 298680 Estimates based on expenditures for one child in a two child twoparent family overall United States Estimates are not adjusted for in ation httpww I nnn quotvia um39i 39 quot 39CRCc1 c20079df Above you see the cumulative totals If you are in the 45800 77100 income bracket and you are average you will spend 204060 to raise your child to the age of 18 Notice that these estimates do not include a college education and they are not adjusted for in ation These estimates are based on the value of a dollar in 2007 Will a year 2017 dollar buy as much as a 2007 dollar Probably not because in ation will erode the purchasing power of that 2007 dollar away over time Any of you all starting to think about the consequences potential cost of a wild Saturday night in terms of an 18 year nancial responsibility before you are adequately prepared to meet that responsibility Ah your thinking that this would not happen to you Everyone I have known that this has happened to thought the same thing and it is not a rare occurrence The costs and bene ts of our personal actions Economics Why understand economics Adjustments If family has only one child they will probably spend 24 MORE than the above amount on that child If family has three or more children family will bene t from economies of scale probably spend 23 LESS on each child httpww rnnnllsr a unw P 39 quot quot CRCcr c20079df This data has been based upon a family with two children If a family has only one child they probably spend about 24 more than the values indicated by our data tables If a family has three of more children the family will bene t from economies of scale and will probably spend 23 less on each child What do you mean economies of scale Well as families get bigger their per unit cost of providing for each family member generally decreases If you are a middle child or the youngest you probably wore a hand me down clothes and played with hand me down toys You were not as expensive to raise as the first born Housing costs are spread over three or four children instead of two Meal preparation for two kids would take just as long as meal preparation for 3 or 4 kids Do you get the idea Businesses also experience economies of scale Large businesses often have lower per unit production cost than small businesses This is true to a point Some businesses get so large that they start to experience diseconomies of scale This occurs most often because the right hand of the business is out of touch with the left hand of the business and per unit costs of production begin to increase due to poor planning duplication of purchases low quality control etc We will talk about this in mule detail later in the semester Adjustments If you are a single parent your monetary costs will be pretty close to those oftwo parent families httpwwwcnpgmsdagovPublicationsCRCcrc2007pdf Notice in the slide above I refer to monetary cost of raising a child There is another cost of raising a child that I cannot place a monetary value on Only a particular individual can place a monetary value on this cost item What is a large nonmonetary cost item incurred when raising a healthy well balanced and socially adapted child TIME Lot s of TIME Your life changes because of how much TIME a child requires to properly take care of My wife and I were raising our grandson of course I still am since my wife passed away When I used to get home from work I had to spend time with Zachary still do Ihad to give my wife a break I did not have the TIME to do a lot of things that I used to have TIME to do I now have less time to do some things that I used to do since there is ust me M late wife did not have the TIME to do the thin s she used to do either Don t get me wrong we loved it and I still do But there is a cost a high cost if it is to be done correctly That high nonmonetary cost is TIME Think for a moment of the nonmonetary cost of TIME to a single parent compared to the shared nonmonetary cost of TIME to a twoparent family A singleparent has it tough in terms of TIME COST Percentage of Your Income High Income families usually spend more on a child BUT if you re in a low income group you probably spend a much higher percentage of your income on a child than wealthier families httpwwwxnppmsdagovPublicationsCRCcrc2007pdf High income families usually spend more dollars on a child but that spending represents a smaller percentage of their overall income Lower income parents spend less absolute dollars on a child but that lower spending often represents a much higher percentage of their overall income when compared to wealthier families Percentage of Your Income Households in Lowest Income Group 29 of household income on a child Households in Middle Income Group 19 of household income on a child Households in Highest Income Group 14 of household income on a child httpWWW Hm quotM9 uvquotr 39 quot 39 39CRCcrc2007pdf What About INFLATION Based on an annual in ation rate of 31 Average from 1987 to 2006 Lower Income Parents will pay 196010 Middle Income Parents will pay 269040 Higher Income Parents will pay 393230 by the time the child reaches 18 years old httpww mnnnsr a onvI quot quotRCcrc2007pdf The average annual in ation rate over the 20 year period from 1987 to 2006 was 31 Over this time period some years averaged less than this amount From 1993 to the end of 1999 in ation averaged 24 In future years in ation may average higher Notice that once in ation is gured in how much the expected cost to raise a child increases For middle income parents they will spend about 269040 by the time their child reaches 18 years old That is over a quarter of a million dollars folks NC Child Support Formula Example for 2007 If have two children and earn 40200year gross income 790m0nth in child support 4740 per child per year 85320 per child over 18 years Now let s take a look at the cost of raising a child from a slightly di erent perspective Let us assume that you have a child out of wedlock or you have a child during marriage but unfortunately get divorced from your spouse Also assume that the child is living with your eXspouse or partner You will probably have to pay some child support The situation in the slide is an actual case that is representative The circumstances of each case are however unique The State of North Carolina uses a formula based on tax records and the amount of support that la y be mandated by a separation agreement to calculate child support requirements In this case the noncustodial parent was earning 40200 gross income and the custodial spouse was earning slightly less than this amount The child support came to 79000 per month for both children That amounts to 4740 per child per year or 85320 per child over an 18 year period NC Court System assumes your support to be 50 of the total support Therefore the state of NC estimates that the total cost of raising a child from 0 to 18 years in 2007 to be about 85320 5 170640 In this case the child support payment came out to be approximately 50 of the total support the state deemed necessary to adequately care for this child Therefore we can determine that the state of NC estimates that the total cost of raising a child from birth to 18 years of age in 2005 to be approximately 170640 without in ation taken into consideration This estimate falls between the estimates quoted by USDA s Center for Nutrition Policy and Promotion for families earning less than 45800 and families earning 45800 to 77100 for the US overall Our case s family income falls in the upper end of the 45800 to 77100 range Remember that families earning a gross income of less that 45800 were expected to spend 148320 per child unadjusted for in ation and families earning a gross income of 45800 to 77 100 were expected to spend 204060 unadjusted for in ation Moral of this Story How expensive can an irresponsible sexual interlude be If you play eventually you have to pay So what is the point of all this information Well you all are adults Most of you are young adults somewhere in the range of 18 to 20 years old Most of you are not yet married but may have a desire to go beyond platonic relationships I am just trying to provide you with some economic information for you to base your choices upon Rational adults process information and assess the costs and benefits of their actions while taking into consideration the probability of each alternative outcome from a decision Think with your brain not your hormones Remember that alcohol and drugs distort the rational decision making process so think twice or even three times before you make a choice that may have very expensive consequences for all the persons that will be affected by the choice that you make You choice you make affects others extemalities Remember we have only accounted for the monetary costs of this situation There are costs that are dif cult to quantify such as the psychic emotional and time costs that are endured by you and all the individuals affected by your decision There are also psychic emotional and time benefits associated with having and raising children that an economist cannot quantify either Over the three year period of 2003 to 2005 US averaged 16053 murders per year 43480 deaths by auto accidents per year httpwwwcdcgovnchsdatanvsrnvsr56nvsr56 10pdf Over the 10 year period of the Vietnam War more than 60000 Americans were killed or missing 1965 to 1975 In 1969 a very hot period during that war 53543 Americans were killed in automobile accidents The statistics listed above are given to provide another perspective on deaths attributed to automobile accidents We often hear about the costs of war in terms of the senseless loss of life and number of murders that occur in our society Obviously the gures above are not death rates per 1000 or 100000 people but looking at the shear magnitude of deaths that occur on our highways in relation to what many of us perceive as the horror of war and murder does provide some information We are seeing about 43480 deaths per year in the US as the result of auto accidents and about 16053 murders per year Recent statistics do point to a downward trend in the number of murders in the last few years During the Vietnam War approximately 60000 Americans are listed as killed or missing Compare that death toll to the approximately 53543 Americans that died on our highways in the single year of 1969 Over the three year period of 2003 to 2005 Of those Americans involved in automobile accidents that are not killed how many are left disabled Not everyone is killed in an auto accident Many are left disabled What is the cost of irresponsible driving In the First Persian Gulf War 35 deaths from friendly re 24 of all battle casualties 148 battle deaths 145 other deaths How long did the Gulf War last If we look at the Persian Gulf War we see that there were 148 American battle deaths 35 from friendly re and 145 other deaths Many of these other deaths were attributed to auto accidents not related to battle conditions How long did the Gulf War last 20 In the First Persian Gulf War Bombing began 300 AM January 16 1991 Iraqi time Operation Desert Storm began February 24 1991 and ended 100 hours later Obviously a very short war 21 In the First Persian Gulf War 43000 auto deaths per year 365 days 118 per day What cost do auto accidents impose on our society as a whole Would the US govt get a better return on our tax dollars to develop programs that would reduce auto accidents Again we are not looking at death rates per 1000 or per 100000 people I am only trying to point out the magnitude of deaths on our highways and to look at a perspective that may be rarely considered Our highways are certainly safer than a war zone relative to the number of people that drive on them What would the net return pro t to society be from a societal change in attitude behind the wheel of an automobile Does society pro t from automobile accidents and the injuries and deaths that occur as a result Think of the auto body shops the undertakers the medical personnel How much is a life worth How much should we spend in efforts to save lives is one persons 01 1ndustry s gI OSS return oIIset by the Cost Incurred by another I think I may have stirred up a few thoughts Email me and let me read what you think 22 The Recession Of cially Ending in the Middle of 1991 US Unemployment Dec 92 73 Dec 93 74 Dec 94 65 Dec 95 54 Dec 96 53 Dec 97 47 Dec 98 44 Dec 99 41 US Bureau of Labor Statistics Civilian Labor Force 16 vrs and over The unemployment rates provided above are seasonally adjusted and are based upon those individuals 16 years and older in the civilian labor force Unemployment has trended down since December of 1993 In April and May 1998 unemployment reached a low of 43 By December of 1999 unemployment reached 41 The last time US total unemployment was this low was January and February of 1970 In April of 2000 unemployment dipped to 39 In August 2000 the unemployment rate 41 percent remained in the narrow range of 39 to 41 percent that has held since October 1999 The rates across major demographic groupsadult men 32 percent adult women 38 percent whites 36 percent blacks 80 percent and Hispanics 57 percentshowed little or no chan e in Au ust 2000 The teena e unem lo ment rate has ed ed u over the ast 2 months to 144 percent The number of unemployed persons was essentially unchanged at 58 million 23 How is the Unemployment Figured Civilian NonInst Pop 209935 million Civilian Labor Force 140742 million Employed 134912 million Unemployed 5829 million Not in Labor Force 69193 million Unemp Rate 5829140742 100 414 Persons under 16 years of age are automatically excluded from the of cial labor force measurements as are all inmates of institutions and persons on active duty in the Armed forces All other members of the civilian noninstitutional population are eligible for inclusion in the labor force and those 16 and over who have a job or are actively looking for one are so classi ed All others those who have no job and are not looking for 0ne are counted as quotnot in the labor force Many who do not participate in the labor force are going to school or are retired Family responsibilities keep others out of the labor force Still others have a physical or mental disability which prevents them from participating in labor force activities In August 2000 the civilian noninstitutionalized population was 209935 million The civilian labor force consisted of 140912 million people The civilian labor force consists of the civilian noninstitutional population that are either working 01 are actively looking for work This means 69193 million persons were not considered in the civilian labor force Of the 140742 million in the labor force 134912 million were employed 5829 million were unemployed no job but wanted one and were actively looking for one This information provides the means to calculate the unemployment rate 5829 million 140742 million 100 414 24 Unemployment by Race US Black Unemp US White Unemp Dec 93 117 58 Dec 94 98 48 Dec 95 102 49 Dec 96 105 46 Dec 97 99 39 Dec 98 78 38 Dec 99 79 35 US Bureau of Labor Statistics Civilian Labor Force 16 yrs and over Dec 94 For the rst time in 20 years unemployment of Black Americans dipped below 10 The US unemployment rate for the noninstitutionalized civilian labor force does not quite show a complete picture with respect to the racial distribution of unemployment Above you see that the unemployment rate of AfricanAmericans is approximately two times the unemployment rate of White Americans Can this difference be attributed to discrimination on the part of employers Some of it probably is but I do not think all of it is Unfortunately discrimination still exists in our society and probably will to some extent for a long time to come What about differences in employment between adult females and males adult here refers to individuals that are 20 ears old or older In Au ust 2000 unem lo ment rate of adult men was 27 percent and of adult women was 33 percent So what might be a good strategy for an individual to follow in order to minimize the affects of discrimination by race of gender Let s take a look at unemployment rates associated with di erent levels of education and see if a strategy develops 25 Education and Unemployment Civilian Labor Force 25 to 64 years old Less than HS Grad Less than College Year HS No College Bachelors Grads 1997 1040 I 51 38 20 1998 85 48 36 18 US Bureau of Labor Statistics unpublished data Statistical Abstract of the US 1999 Table No 684 From the data presented above it should be obvious that unemployment is probably correlated with education level This data suggests that on the average the higher the education level the lower the unemployment rate The data above is for all members of the civilian labor force that are 25 years to 64 years old Therefore we might conclude that if you want to decrease the risk of being unemployed or decrease the duration of unemployment higher education appears to be a strategy the may prove successful You have probably chosen to attend college for this reason as well as many others I would also encourage you to examine a secondary strategy as well Learn to do more than one thing very well While Iwas in undergraduate and graduate school at NCSU I was em 10 ed as an automotive and e ui ment mechanic with a midsized construction rm in Raleigh My mechanical skills were developed through self teaching and experience Aperson can make a pretty good living as an economics teacher and they can make a pretty good living as a mechanic as well Where is it written that you cannot achieve a higher education and learn a trade as well You have a great deal of control over you own destiny when you have a personal tool box of diversi ed skills and abilities Here is one place you can begin or add to your tool box 26 Education and Unemployment Civilian Labor Force 25 to 64 years old Less than Year HS 2000 63 2006 68 www manequot c HS Grad N0 College 34 43 Less than College Bachelors Grads 27 17 36 20 An A An d 27 Education and Unemployment White Civilian Labor Force 25 to 64 years old Less than HS Grad Less than College Year HS No College Bachelors Grads 1997 94 46 34 8 1998 75 42 32 17 US Bureau of Labor Statistics unpublished data Statistical Abstract of the US 1999 Table No 684 Here we are looking at unemployment data for the white population in the US You should be able to see by ipping between the slides that the unemployment of White Americans is slightly less than the overall unemployment level This tells us that there are other demographic groups that have much higher unemployment levels But please notice that the correlation between education level and unemployment is still evident in this data 28 Education and Unemployment White Civilian Labor Force 25 to 64 years old Less than 118 Grad Less than College Year HS N0 College Bachelors Grads 2000 56 29 24 16 2006 59 37 32 20 www 0mm quot L tnlLJes0850609pdf 29 Education and Unemployment Black Civilian Labor Force 25 to 64 years old Less than HS Grad Less than College Year HS No College Bachelors Grads 1997 166 82 61 44 1998 134 84 64 21 US Bureau of Labor Statistics unpublished data Statistical Abstract of the US I999 Table No 684 This data focuses on the AfricanAmerican civilian labor force Yes the unemployment rates for AfricanAmericans is higher than that of White Americans at each education level But look at what happens to that unemployment rate as education level increases The unemployment level decreases significantly as education level increases Yes there is still a difference between AfricanAmerican and White unemployment at the college graduate level of education But that difference is much more narrow than the difference at the other education levels What do you think Let s get a little discussion going here We certainly have not shed any light on the problems of access to education or the uniformity of education We have only presented data that suggests that as education levels increase unemployment decreases for AfricanAmericans and White Americans Therefore take advantage of the educational opportunities of this University while you are here Do not let this opportunity slip through your fingers by choosing social fun over the difficult road to achieving an education 30 Education and Unemployment Black Civilian Labor Force 25 to 64 years old Lessthan HS Grad Less than College Year HS No College Bachelors Grads 2000 107 64 40 25 2006 128 80 62 28 www 0mmquot J39 quot Lltablcs0850609Qdf 31 Theory and Models Economics is a social science that makes use of similar methodology used by the hard sciences biology physics etc The hard sciences refer to this method as the scientific method in economics we will refer to this method as the economic method 32 The Scienti c Method Step 1 The observation of phenomena Step 2 The formulation of a hypothesis concerning the phenomena Step 3 Experimentation to demonstrate the truth or falseness of the hypothesis Step 4 Develop a conclusion that validates or modi es the hypothesis 33 The Economic Method1 Step 1 Identify and state the problem Step 2 Apply the relevant economic model Step 3 Identify the solutions Step 4 Evaluate the solutions Step 5 Select and implement a solution Adaped from Mabry and Ulbrich quotIntroduction to Economic Principles I989 You will notice a line drawn between Step 4 and Step 5 What do you think the significance of this line is Well if you have been reviewing your notes and studying you may have a good idea Think for a second before you go on Remember our discussion of positive and normative economics Positive economists at the macroeconomic level stop at Step 4 This is the point that economic analysis is handed over to the politicians or policy analysts to select and implement a solution Politicians and policy analysts make the normative Judgements that they are elected or h1red to make based upon the economlc analys1s and the preferences of the public that they serve This is the way macroeconomic policy decisions are made in a representative democracy I also hope you realize the importance of an educated citizenry to the survival and peaceful continuance of a representative democracy You theoretically call the shots in the long run through the voting process One of our responsibilities as citizens is to take care of business not have business taken care of for us What about at the microeconomic level Well there you are the positive economist and the normative decisionmaker When you own and operate your own business you are the one calling the shots What choices will you make What tough choices will you have to make Well understanding economics will hopefully help you learn the processes to use in making 4 our choices Some have even referred to economics as the science of making choices 34 Theory and Models Models Simplified representations of the real world that we use to help us understand explain and predict economic events in the real world Did you ever put together a model airplane or car Did you ever play with dolls A toy rearm or knife An EasyBake Oven All are simpli ed versions of the real thing that you may have played with and were part of your informal childhood education Economics uses models as well and we will play with them too During this course we will be building and using economic models These models will be in the form of graphs relational graphics and mathematical representations of theories that will attempt to explain and predict economic outcomes 35 Theory and Models No model captures every little detail and interrelationship that exists Models are abstractions from reality We make simplifying assumptions to develop models Our purpose is not to try and capture every little detail and interrelationship that may exist We are looking more for the big picture or basic understanding of what is occurring One major simplifying assumption made in economics is referred to as ceteris paribus This is Latin for other things being equa or all other things remaining constant 36 Theory and Models A Good Model should capture only the essential relationships that are suf cient to analyze a particular problem or answer a particular question A Model is the guideline we follow to analyze economic problems and predict outcomes 37 Theory and Models Questions How do consumers respond when the price of a commodity changes What choices do they have What choices do they make Now let us determine what models you already have developed intuitively through your up bringing in a market oriented economy How do people respond to price changes What if price increases for boneless chicken breasts how would you expect people to respond What assumptions will you make before you answer What alternatives do the consumers have who face higher boneless chicken breast prices What choices will they make 38 Theory and Models Dove season opens soon and we want some shotgun shells How we will respond to a price of 1000 per box of 25 shells There are probably thousands of determinants affecting how each consumer will respond to this high price I don t know how good a wing shooter you are but those delicious dove breasts wrapped in a piece of bacon laid over some hot charcoal could get real expensive if dove shells were 1000 a box at Walmart and Kmart instead of 300 to 400 a box How would you respond to this high price for shotgun shells Well if we assume that the price of dove shells increases to 1000 lthink it would be safe to assume that most folks would purchase fewer shotgun shells You have probably heard people refer to this phenomenon as the law of demand As pr1ce 1ncreases consumpt1on decreases ceter1s par1bus r as pr1ce decrease consumption increases ceteris paribus Would your behavior while hunting change any Would you be more conservative with your shots C mon now will you take as many shots at birds ying in the ozone layer Or will you more carefully select the shots you take with these high dollar shells This change in behavior results in less consumption What other actions might you take Will you search out substitutes Yes a substitute You could reload your own shells rather than purchase them from Walmart or Kmart You may find a mailorder firm that sells only case lots but at a much reduced price You and your buddies could split a case What if you are very wealthy would 10 per box change your consumption very uiuui at 39 Theory and Models Many of these determinants were left out of the model we used to answer the questions above Our class model probably included The price of the speci c commodity The income of the consumer The price of substitutes for the commodity There are several determinants involved in this purchase decision that will ultimately shape the demand for shotgun shells at the market level We focused primarily on three determinants of demand here The price the income level of the consumer and the price of substitutes We will learn of more determinants of demand later in the course I hope you are starting to understand why the assumption of ceteris paribus is so important By asking the question What would you expect to happen to the consumption of shotgun shells during dove season to do if the price of shotgun shells increases from 325 per box to 1000 per box ceteris paribus we are holding all other things constant We would likely come to the conclusion that less shotgun shells would be consumed b dove hunters on avera e in eneral 40 Theory and Models These 3 determinants do a good job of explaining the behavior of consumers with respect to a price change Later we will learn that there are in excess of 10 determinants that affect consumer demand It can be tough to predict how people will respond to a price change if we have ten different factors that can be changing at the same time or over a period of time We rst need to understand how each determinant can affect the outcome while holding all the others constant Once we understand the impact that each determinant may have individually then we can start to make more accurate predictions based on more than one determinant changing simultaneously We rst must learn to crawl before we walk and walk before we run We will need to follow this same sequence as we explore economics 41 Theory and Models An economic model is nothing more than a set of de nitions assumptions and hypotheses that are put together in a manner that expresses the relationships of certain observed events in a meaningful way 42 The Consumption Production Model In Equilibrium Stable INVENTORIES Illustrated above is what I call the ConsumptionProduction Model illustrated in equilibrium We could use this model to examine a macroeconomic or microeconomic issue When the rate of consumption of a commodity is just equal to it s rate of production the price of that commodity is stable at it s equilibrium price or market clearing price You also notice that inventories are stable indicating that there is not a shortage or a surplus of the commodity Inventories are often referred to as buffer stocks Inventories are what many managers watch to determine whether a market is in equilibrium or not If inventories are increasing this is an indication that the current rate of consumption is less than the current rate of production and the market is not in equilibrium at the current price level A surplus of the commodity is developing If inventories are decreasing this is an indication that the current rate of consumption is greater than the current rate of production and the market is not in equilibrium at the current price level A shortage of the commodity is developing 43 In Disequilibrium P Iv f lhwsmmManmmgurwmmdthS case Above we see a market that is in disequilibrium The current rate of consumption is less than the current rate of production at the prevailing market price As a result inventories are increasing These increasing inventories will pressure a manager to take some action What would you do Let s assume that this is the market for Ford F150 extended cab 2wheel drive pickup trucks Could we slow down the assembly line to reduce the rate of production Yes but now we are producing fewer trucks during the same work day or work week What will happen to overhead costs per truck produced What will happen to labor cost per truck produced This action would cut into per unit pro t margins We could shut down the plant temporarily and lay our workers off Not a cheap alternative either Our unemployment insurance rates will increase and some workers may nd another job Don t forget those overhead costs that keep on going whether we are producing or not We have been focusing on the production or supply side of the equation here What about looking at another perspective the consumption or demand side of the management decision What could we do to increase consumption of our trucks Lower the price That is easy and cheap to do Yes this action MAY cut into our profit We might be surprised to learn that profits MAY increase but that is a discussion for later in the semester We could offer a rebate lower price low interest financing lower price andor dealer incentives lower price 44 In Disequilibrium What if production process is at full capacity What if production process is at less than full capacity If the production of F150 trucks is currently at full production capacity then it might not be so costly to slow the rate of production down a little and monitor inventories to determine if the market has stabilized Slowing the assembly line down or cutting back to 36 hour weeks from 40 hour weeks may be a viable option If the production of F150 trucks is currently at less than full production capacity then it will become increasingly expensive to slow the rate of production further Our manager would probably look on the consumption side of the equation for some help Lowering the price a little may be all that is necessary to bring the market back into equilibrium We would again monitor inventories to determine if our pricing strategy has been successful or not Another strategy may be to increase advertising in an effort to enhance consumption Have you heard read or witnessed any of what we have discussed occurring in the real world out there What should our manager do Well heshe will need to assess the costs and bene ts of each of the alternative courses of action to determine which action would be the most pro table 45 In Disequilibrium P Iv 1 IhwsmmManmmgurwmmdthS case The market is again in disequilibrium The current rate of consumption is greater than the current rate of production at the prevailing market price As a result inventories are decreasing These decreasing inventories will pressure a happy manager to take some action What would you do Let s assume that this is the market for Ford F150 extended cab 2wheel drive pickup trucks Could we speed up the assembly line to increase the rate of production Yes but what may happen to the quality of the nished product Are recalls cheap to deal with Will ontheJob acc1dents 1ncrease dr1v1ng up our workman s compensation rates Will workers start calling in sick because they are so tired What if we keep the assembly line at the same speed and work folks overtime Time and a half can get expensive quick We could build another plant and hire more workers Is this excess demand permanent or just temporary A new plant would cost hundreds of millions of dollars Not a cheap alternative either Again we have been focusing on the A roduction or suA A 1y side of the e Auation here What about looking at another perspective the consumption or demand side of the management decision What could we do to decrease consumption of our trucks Raise the price That is easy and cheap to do We could hold rm on the sticker price at dealerships oiTer only market interest financing andor not offer any dealer incentives 46 In Disequilibrium What if production process is at full capacity What if production process is at less than full capacity If the production of F150 trucks is currently at full production capacity then increasing the rate of production a little may become very expensive in a hurry Perhaps our manager should begin studying to determine if another plant would be a viable option in the long run But our manager would probably look on the consumption side of the equation for some help in the short run Raising the price a little may be all that is necessary to bring the market back into equilibrium We would again monitor inventories to determine if our pricing strategy has been successful or not Anuum shategy may be to decrease or cut advertising in an effort to reduce consumption If the production of F150 trucks is currently at less than full production capacity then increasing the rate of production may be a viable option to pursue Have you heard read or witnessed any of what we have discussed occurring in the real world out there The 1997 Ford F150 extended cab ran into the problems described above What should our manager do Well heshe will need to assess the costs and bene ts of each of the alternative courses of action to determine which action would be the most pro table 47 Short Run vs Long Run Short Run39 a period of time that is not long enough to allow change to certain economic conditions that a decision maker may face Long Run39 a period of time long enough for all important information and choices to be available to a decision maker 39Mabry and Ulbrich Introduction to Economic Principles 1989 In our previous discussion the terms short run and long run were mentioned What do these terms mean Well there meanings are unique in economics relative to the way we often hear the terms in every day use Aformal de nition of each may be found in the glossary of your text books Look them up and read them I ll use an example borrowed from Mabry and Ulbrich 1989 the short run is the time period in which one or more important conditions cannot be changed A rm may make a decision in the short run because its building lease runs for another year or two or because its workers have a threeyear labor contract vvu11ula may make a decision in the short run because they have a xed commitment such as wanting to stay put until their children nish high school Thus most of the rm s workers may accept a pay cut in the short run but once their xed commitments are gone the longrun response may be very di erent For some rms or individuals the short run may be only a week or a month while for others the short run may be years The exact length of the short run depends on the length of the xed commitments people face in a given situation The long run is the time period in which anything can be changed or in which individuals and rms are fully able to respond to economic incentives and take advantage of economic opportunities The long run has no speci c time frame it is simply the time period that is long enough to allow full response to changing incentives 48 ltgt Production Possibilities uction Possibilities While in school you allot yourself a certain period of time to study A Given a 70 hour week 7 days 10 hours a day you can 1 study all the time possibly a very dull person Given the solid work ethic students have today we can assume that all of you are accustomed to 70 hour work weeks While in school you could use this time to study all the time or uction Possibilities 2 play all the time possibly a very ignorant person 3 do both one at the expense of the other alternative such that A person could use this time to play or party all the time Or a person could use their time to do both but one at the expense of the other opportunity cost uction Possibilities a You are a well rounded person b You are a little dull at a party but you are all right C You are a little ignorant at a party but you are all right Doing some of both is a good idea but the proportion of each will be related to the nal outcome The correct proportions of each will lead to a well rounded person What is the correct proportions Well that will very with each individual Many people learn by trial and error Some people just seem to have a plan worked out that is best for them Some people never do learn the appropriate proportions of each or learn them at a later stage in life Anyway I hope that you are understanding that there are tradeoffs that we must confront and some of those are confronted on a daily basis StudyW0rk Tradeo B Assume that you are only taking two courses Livestock Management and Agricultural Economics 1 Also assume that you have a part time job and only have 10 hours a week allotted to study for both subjects outside of Class 5 We are going to assume that a hypothetical student is only taking two courses This will keep us on the twodimensional plane of the blackboard to graphically illustrate the tradeoffs that this student is confronted with We will also assume that this student has a parttime job and is only allocating 10 hours a week to study for the two courses he she is registered for StudyW0rk Tradeo 2 Your grade in each course will be a function dependent upon of how many hours you study each subject Numerous studies have discovered that there is a positive correlation between the hours one studies in a subject and the grade that individual receives in that course Typically the more time you dedicate to studying the higher the grade one receives StudyW0rk Tradeo 3Assume if you study 0 hrs for economics get F in econ A in livestock 25 hrs for economics get D in econ B in livestock StudyW0rk Tradeo 50 hrs for economics get C in econ C in livestock 75 hrs for economics get B in econ D in livestock 100 hrs for economics get A in econ F in livestock 8 time of the trade o above ld look like this Egrade Livestk 10 hrs 1 0 hrs E grade ECQn The graph above illustrates the tradeoff our student faces by only allowing ten hours of study for both subjects combined Our student needs to study ten hours a week in each subject in order to receive an A in each subject But remember that our student is only allocating ten hours a week to studying Five hours in each subject would yield a C in each course raph above was prepared the following data set X Y hrs on econ hrs on lstk F 0 100 A D 25 75 B C 50 50 C B 75 25 D A 100 0 F 10 Above is the data set used to construct the graph on the previous slide Next to the hours of study is the associated grade assume you cutback on k and you now have 20 hrs a week to study what will happen 11 Let us assume that our student is starting to learn that college courses take a bit more study time than what may have been required in high school So our student cuts back some on the parttime employment and allocates 20 hours per week to study for hisher courses Our student is now adding some more time resources to the potential production of grades Egrade Livestk 10 hrs 1 0 hrs E grade EClOil Here is another look at the graphical illustration when our student applies only 10 hours per week to study Egrade Livestk 10 hrs 20 hrs 10h E d E rs gra 9 C10 Allocating an additional ten hours per week for a total of 20 hours per week of studying the linear production possibilities curve in this example shifts outward due to an increase in available resource allocated to producing grades Now our student can apply 10 hours of study to each course per week A potential grade of A in both courses PRODUCTION SIBILITIES CURVE Lets look at an economy and break down the commodities into two commodity groups 1 Agricultural goods amp services 2 Nonagricultural goods amp services 14 PRODUCTION SIBILITIES CURVE Lets make some initial assumptions associated with the PPC 1 All resources are utilized and are fixed 2 Technology is not changing 3 Resources are not perfectly mobile 4 There are only two commodities 15 All resources are utilized and xed means that all land capital labor and entrepreneurship are being utilized to produce goods and services and what quantity of those resources we currently have are all we are going to get We are also assuming that technology is xed We are going to assume for a short while that no new technology is coming down the pipeline What technology we currently have is all we have to work with We also are going to assume that resources are not perfectly mobile This is a realistic assumption relative to the rst two In our previous student studying example we implied resources WHERE perfectly mobile One hour of study in ag econ was just as productive as one hour of student in the livestock course Most resources are not perfectly mobile A resource used in agricultural production may not be as productive if used in nonagricultural production CLll l now illustrate the PPC 05 b af Ag Gauds peryear unattainable production frontier attainable b N anrAg gaads per yeal6 Above 15 a gmphlcal lllusLleon ofa PPc relaung the dollar value of n V a le H Mn pr ductlon are not perfectly moblle between the two alternatw es The actual e ltse fcan be consldered a oun ary or ontter All polnts on orwthln the PPC are Consl ered to be u attalnable Comblnatlonsquot ofag an nonrag goods and semces PolnLS not on the productlon erontter that are outslde unauanaol Comblnatlonsquot of ag and nonrag cornrnodltles polnts outslde othe have the resources or the technology to produce those cornblnattons ofag and nonrag goods and semces Ifwe had access to more resources ornew V n l encompass some new polntsthatwere once unattalnable PPC Curve oz Vertical axis value of agricultural goods amp services produced per year ozo Horizontal axis value of nonag goods amp services produced per year 17 PPC Curve oz value the sum of the price of each commodity produced times the quantity of each commodity produced ozo In our example the value of ag goods value of nonag goods equals gross domestic product GDP 18 The PPC Frontier The PPC frontier shows all the combinations of the two commodities that can just be produced if all resources are fully employed with the technology currently available 19 PC curve illustrates 3 concepts quot ming resources are fully employed Scarcity This is shown by the unattainable points Choice Any of the attainable points are possible 20 PC curve illustrates 3 concepts quot ming resources are fully employed Opportunity cost This is due to the downward slope of the production possibilities curve ie To get more nonagricultural goods you must give up some agricultural goods 21 explanation of the negative e of the PPC The PPC is bowed out and slopes down because of the LAW OF INCREASING COSTS The more of one good the economy produces the greater the amount of other goods that must be given up opportunity cost increases at an increasing rate 22 ofln creasing Costs 55 Non Ag 23 nonragrlcultural goods and semoes oh the xraxls oh the yams you should see an equal mememal mease othe dollarvalue ofaglcultural goods and semoes from o to 4 unlLs As the dollar value of aglcultural goods and semoes IS meased from 0L0 l unlt you should notlceLhaL avay small gweh up opp ormnlty cost Ifwe mease the dollar value of agncultural goods and semoes Born 1 Lo Zunlts an equal lncremental Increase you l goods and servlces had lo be sacrlflced lncreaslng opportunlty cost To gel more and more nonragnculmml producuon 55 Non Ag 24 The solld colored llnes above lndlcate the dollar value ofnonraglcultural goods and smlces that had to be glven up lo acqulre Lhe nexl equal morememal dollarvalue ofaglculmml goods and servlces As you oansee lncreased at an lncreaslng lane gotblgger and blgger y do costs increase as more ore of one commodity is oz Resources are not easily adaptable to all types of production Not Perfectly mobilell oz It costs more and more to shift not so adaptable nonag resources into agricultural production or Visaversa 25 0mic Growth Over time we would like to see the PPC shift outward When the PPC shifts outward the economy has grown and our standard of living is often enhanced An outward shifting PPC over time illustrates the ECONOMIC GROWTH you here about all the time on TV and read about in the newspaper 26 can cause the PPC to shift ozo Remember the initial assumptions we made They were somewhat constraining lets begin to relax them ozo Remember we assumed that technology and the amount of available resources were fixed or held constant 27 oved Technology ozo An advancement in technology means more goods and services can be produced with the SAME amount of available resources PE 28 Whenever we can produce more goods and services with the same amount of resources or less resources physical ef ciency has been enhanced Ag Goods Hybrid Com Example mamas 29 hyb ld com yarletles became wldespread alter World War 11 com ylelds lncreased drarnatlcally resultlng In more com belng produced Wth less L fore e deal In favor othe dollaryalue ofaglcultural goods and servlces But you r l W39hy7 r productlon due to hybnd corn technology These freed resources from agrlcultural were now avallable for nonragnculmml producuon Therefore and more resources to nonraglculmml uses and ocpand Lhe productlon u n l at l technology have been human resources labor and entrepreneunal talent C m 8 8 F E 8 2393 a E 8 8 F 5 or more dunng a wee wlthout cash wages Thls 1940 populatlon totaled 30546573 orz3 33 ofthetotal U s populatlon 130962661 As you can n lud serylces otherthan aglcultural cornrnodltles Ag Goods Microcomputers WonAg 30 T r throughout the economy Ifone purchases a tractor today they purchase mlcroprocessors that control the mglne and kansmlsslon functhns Thae are hook ups for a lap lop compuher a global posmomng syslom and data poms for lmplommls that would facllltate preclslon agnculmre Lechnlques Ifyou flnanclal records Advances in technology allow us to increase output with the same or a lessor amount of inputs What about increases in resources themselves 31 If we are able to increase the quantity of resources such as land capital labor and managerial talent then we could also increase economic growth The production possibilities curve shifts right For example Increased labor force due to population growth 32 Ag Goods Increased Labor Force WonAg 33 Increasrng Lhe srze ofthe labor force W111 mease the amount of ag and our r we are measmg the labor force by about 1 pemmtage pomt per year Not a very srzeabte rncrease m eeonomre growth 39ttle History Why did the Romans conquer the world as they knew it Why did the US allow so many people to freely immigrate to this country in the 18th 19th and early in the 20th century Why did we expand to the West coast The Romans were after resources Land capital and human resources Many of the cultures they conquered were enslaved to produce the infrastructure of Rome The Greek culture was absorbed into Roman culture The Romans used Greek technology for their own ends The Greeks served as teachers of Roman children and servants in Roman households Other cultures were not so lucky The US needed human resources to foster economic growth Immigration was a source of these human resources We needed people to expand our economy from the Atlantic coast to the Paci c coast We conquered indigenous people to acquire land resources and advance the US economy 39ttle History Why did Hitler blitzkrieg through Europe in 1940 Why did Sadam Hussein invade Kuwait in August of 1990 35 Hitler raced through Europe with the largest military apparatus the world had witnessed to that point to secure additional resources to grow his military machine ever larger Military production is a form of economic production Military production requires economic resources The people of Europe were enslaved to produce war materials Factories were converted to produce war materials Hitler was after economic resources Sadam Hussein was after oil A land resource to expand his economy If we look throughout history most wars between people have had economic resource roots in one way shape or another ent Mix of Consumer and ital Goods The present mix of consumer and capital goods can affect the future economic growth of an economy 36 Capital is by de nition the manmade aids to the production process Our machinery equipment tools buildings factories etc We can build capital We can build increasing amounts of capital by diverting resources from the production of consumer goods and services to the production of capital goods How wlll the present posrtron on thrs 55 Consumer Goods productron possrbrhtres curve affect the Pt f 5 A uture postron o he vs one PFC What rt the current posrtron ls A7 Pt B i Qty needed to Caprtal Goods marntarn Economy 37 In the dragam above you see the dollar value of consumer goods on the y axls and the dollar value of caprtal goods on the xraxls We create a new productron possrbrlrtres curve rllustratrng the traderoffbetween consumer r r t l D large quantrty ofconsumer goods and a small quantrty ofcaprtal goods pornt on the e BlllustratesjusLLheop srte N r hash ar ls hash mark represents the quantrty of caprtal goods that need to be produced by e con yt ln nthee yatrts tprodctronleve porntB ad sto our caprtal sto an rncreasesthe quantrty ofone o e factors ofproductron thus allovvrng the economy addrtronalresources by whrch to gow Point A The economy has lots of consumer goods and little capital goods The emphasis is on the short run and not on the long run A large shift in the Ag vs NonAg production possibilities curve would not be expected In this case the economy will have more Consumer good consumption now than at point B but future Consumer good consumption will be less 38 Point A will make a lot of people happy in the short run Consumer goods and services will be plentiful and relatively cheap WalMart and Kmart shoppers are elated But down the road the quantity of consumer goods and services will start to decrease and their price increase as the economy starts to contract as capital wears out and is not replaced If the mvestment m capxtal 15 less than Ag the deprecxanon of capnal the PFC could shm mward wear out the economy Wm contract The PPc curve Wm Sm mward toward the ongm Point B The economy has lots of capital goods and little consumer goods The emphasis is on the long run and not on the short run A large shift in the Ag vs Non Ag production possibilities is possible In this case the economy will have less present Consumer good consumption now than at point A but future Consumer good consumption will be morezi0 Point B will make a lot of people unhappy in the short run Consumer goods and services will be less available and relatively expensive WalMaIt and Kmart shelves may look like the day after a major snow storm or hurricane in the southeast But down the road the quantity of consumer goods and services will increase and their price decrease as the economy starts to grow as new capital comes on line that will increase production possibilities Consumer Goods Pt A I Qty needed to 53 Capital Goods mamtam Economy used to produce addxuonal consumer goods and semces m the future In nus case the economy mvests heavily m producnve capual so u ls possxble to have lots more Ag and NonrAg consumer goods m the future s NonrAg Onr M thePPc m mum value ofag and dollarvalue ofnonrag commodmes shx s outward ulusuuung economic growth ofthe economy 4 b ERMINANTS 0 the PPC f 1 Quantity of resources FOP39s available for society to utilize a If resources increased gt output is increased cp 43 2 Improvements in Physical efficiency New Technology Enhanced Productivity a increase units of output units of input b If resources are currently fixed this is one way to shift the PPC outward to achieve economic growth 44 3The current mix of capital and consumer good production a If we increase capital good production relative to consumer good production gt this increases one of the FOP39s capital gt this increases potential future output 45 b This is the primary reason for investment tax credits and capital gains tax rates 46 4 Mobility of resources a If we increase improve the mobility of resources between the production of different commodities 47 We decrease the opportunity cost of moving resources from the production of one commodity to the production of another We take some of the bow out of the PPC curve 48 b By reducmg the opponumty cost the potenttat output ofboth Commodities IS mcreased C Our economy is more resilient to changes in world economic conditions resources are more quickly re employed if displaced from the production of a particular commodity 50 temporari1y unemployed resources are more efficient when reemployed in the production of alternative commodities 1ess training or modification is required therefore their is a lower cost of reallocatmg these resources 51 1 Which of the four categories of the FOP39s is our society most concerned with in the shortrun LABOR ENTREPRENEURSHIP OR MANAGEMENT 52 When these two human resources are unemployed the social costs are enormous Circular Flow gt decreased disposable income gt decreased demand 53 e HOW do we make these two FOP39s more MOBILE increase the educational and technical skills level of our society PRACTICAL AND PERSONAL LICATION OF THESE CONCEPTS There is a trade off between investment in education and current consumption As you invest more in education your current consumption decreases but your future consumption will likely increase The relationship between your current investment in education and your future consumption can be shown with production possibilities CUI39VGS 55 Academics vs Leisure Hrs of Academxcs 16 16 Hrs of Lexsure 56 m uha e smdymg and playmg PomtArepresmLs a sxgm cant amount omme m m D u u sxgm cantumeplaymg wah much less ume studymg W39hatmaybeLhe possxble outcome ofthesetwo choxces PomLA orPomLB sic Wants Us Other Wants with Your HS Diploma Basic ants mus Other Wants 57 waan m llfe and the dollar Vlalue of all the otha waan we have m llfe 3 h1g1 school educauon What Are Basic Wants ozo Single wide mobile home ozo An old used vehicle oz Potatoes and Macaroni and Cheese ozo Clothes from the Factory Seconds Store oz 58 What do I mean by basic wants Well we need some shelter A cardboard box is all the shelter that some folks have but here we will assume this to be a single wide mobile home Transportation Feet or a bicycle are pretty basic but we will assume an old used motor vehicle Food Well let mignon is not basic fare We need some calories from carbohydrates andor fat and some protein some minerals and vitamins Potatoes and macaroni cheese are pretty basic We ll throw in some Ramen noodles for a little pizzazz Clothing Good Will and the Salvation Army can provide some functional used clothing for us Anything else for our basic survival at Are Other Wan ts oz A 2000 or 3000 sqft home with an acre ozo A new vehicle to drive oz Rib eye and Tbone steaks Shrimp ozo Fashionable Clothing Carhart s oz A vacation at the beach or mountains oz Going out for dinner ozo Affording hobbies and recreation 59 Now the things listed above are not basic These represent a small fraction of all the other things we want Many of the things listed we all take for granted as being available to many of us Academics vs Liesme Hrs of Academxcs 16 PtA 16 Hrs of LexsugE Wen hae 15 our traderoffpxcmre agam W39hxch pomthave we chosen um saneste W39hxch pomtwlll we choose m the future7 Choosing Point B Point B represents lots of Leisure now and little investment in Academics education now In this case the PPC for Basic Wants and Other Wants may not shift out very much if any relative to the PPC with a HS diploma 61 Ch005in g Point B EBastc Wants ch 0ther Wants 62 progressmuch further than the PPC fora hrgh school educattort In other words PomtB does not afford you the educattortat resources necessary to shrtt the PPC curve out to the nghtvery far Academics vs Liesme Hrs of Academxcs 16 l Hrs of Lxesugg Choosing Point A Point A represents lots of investment in Academics education now and little consumption of Leisure now quotChoosin g Point A EBaslc Wants PFCA 0ther Wants 65 u your personal PPc out to the ngnt lllustratlng personal economlc gowth that may provlde Lhe llfestyle ofyour dreams Take advantage ofalthe educatlonal opportunltles thattnls geat Llan erslty olrers to you Use your tlrne here wlsely Use your tlrne to learn all that you can posslbly learn so that leamlng can be put to produotlye use to determlne your future The cholce IS yous The Choice is Yours The outcome of choosing Point A or Point B is based on the progress made in the same amount of time Its your free and independent choice of which point on the Academic vs Leisure PPC to be on Which will you choose 66
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